In my experience as a global CFO, I’ve learned that financial success isn’t only about growth, revenue, profit margins, and EBITDA—it’s also about the engine that drives it all: net working capital. Think of it as the lifeblood of your business. A healthy working capital cycle ensures you have the cash flow to invest in growth, weather unexpected storms, and ultimately thrive. And the three pillars supporting this crucial cycle? Inventory, accounts receivable, and accounts payable. Let me share some insights from my experience on optimizing each as I’ve seen the good, the bad, and the ugly when it comes to managing them.
Accounts Receivable & Lapse Days
Accounts receivable can be a real rollercoaster. One minute you’re celebrating a big sale; the next, you’re chasing down late payments, feeling like a collections agent rather than a CFO. I’ve seen firsthand how late payments can cripple cash flow, create tremendous liquidity uncertainty, and pose financial risks through bad debt. Two key metrics I always keep a close eye on are Lapse Days and Days Sales Outstanding (DSO). These numbers tell the story of how efficiently your AR department is producing and submitting invoices—and how effectively you’re collecting on payments.
First, clarity is king. Crystal-clear payment terms, spelled out in every contract, engagement letter, and purchase order, are non-negotiable. Second, invoices must be submitted correctly the first time (“First Time Yield“). With the rise of online vendor portals like Ariba and Tipalti, invoice accuracy is paramount. Any discrepancy, no matter how small, can trigger a cascade of reconciliation nightmares and delay payments. Often times invoice discrepancies and thus a higher lapse day KPI can be in the form of incorrect taxation. Tax compliance is crucial. Understanding sales tax, VAT, and withholding taxes is not just an accounting exercise—it’s a business imperative. Automating these processes with tools like Avalara frees up valuable time and minimizes the risk of costly errors.
Beyond these foundational upfront invoicing elements, relentless customer follow-ups and clear payment options are essential. I’ve found that implementing a routine system to prioritize overdue invoices helps focus collection efforts where they’re needed most. Of course, preventing bad debt starts with thorough customer credit evaluations upfront—it’s much easier to avoid a bad debt situation than to recover from one. Finally, regularly monitoring of AR metrics by customer and invoice, analyzing trends, and sharing insights with the entire AR team and sales team are critical for proactive management.
Inventory & Supply Chain Management
Inventory management is a constant balancing act—too much inventory ties up precious capital and risks obsolescence, while too little inventory can lead to stockouts and lost sales.
Just-in-Time inventory management is a powerful tool when implemented correctly. The goal is to receive inventory as close as possible to when it’s needed, minimizing storage costs and reducing the risk of obsolescence. Closely monitoring inventory turnover ratios (DIH, DIO, etc.) helps identify slow-moving items that need to be addressed. Accurate demand forecasting is essential for ordering the right amount of stock. This requires collaboration with sales, operations, and supply chain teams to understand market trends and customer demand. Making the right Economic Order Quantity (EOQ) calculations through Material Resource Planning (MRP) is critical to determine the most cost-effective order sizes. On top of that, visiting facilities and overseeing inventory audits, physical counts, and cycle counts helps identify discrepancies and ensure data accuracy.
Strong vendor relationships are also crucial. Negotiating favorable payment terms and shorter lead times can significantly impact working capital. Strategically using blanket purchase orders (POs) and shifting the burden of inventory holding to vendors can be a worthwhile strategy. Instead of stocking large quantities of raw materials or finished goods, work closely with key suppliers to establish blanket POs that cover anticipated needs over a specific period. This allows you to order smaller quantities as needed, reducing inventory carrying costs.
A particularly tricky area I’ve navigated many times is managing inventory for new product launches. It’s a delicate dance—you want to capitalize on early demand and secure favorable vendor pricing with larger orders, but you also face significant uncertainty about actual market uptake. My approach has always been to develop multiple demand scenarios—optimistic, realistic, and pessimistic—and work closely with sales teams to refine forecasts. We then use a phased approach to ordering, starting with smaller quantities to test the waters and scaling up production as demand becomes clearer. Clear communication with vendors is essential in these situations—building flexibility into contracts and establishing return policies provides a safety net if demand falls short of expectations.
Accounts Payable Processes
Accounts payable (AP) is often overlooked as a lever for working capital optimization. Ensuring that your vendor payment terms align or exceed your AR collections can be a helpful strategy to free up net working capital. Track your Days Payable Outstanding (DPO) regularly and keep a close comparison of it with your DSO.
Moving toward a paperless environment is another no-brainer—yet I’ve seen many companies still processing and filing paper invoices (those days should be over!). Implementing e-filing and strengthening internal controls around AP processing and contract review are essential for minimizing risk, improving auditability, enhancing controls, and ensuring that you have the processes in place negotiate better terms with suppliers.
Setting up supplier portals empowers vendors to track order status, delivery schedules, and payments—reducing inquiries and improving communication. Finally, strengthening daily and weekly purchasing approval processes ensures spending is controlled and aligned with business objectives.
Beyond the Basics: Financing Options
Sometimes, even with the best optimization efforts, you might need additional financing options to bolster working capital. I’ve explored various options over the years, including letters of credit, single-use accounts, asset-backed lending (ABL) facilities, supply chain finance, and AR factoring. Each of these tools can help manage liquidity and mitigate risk, depending on business needs and your cost of capital.
Cash & NWC Forecasting: The Key to Proactive Management
All of these optimization efforts are significantly enhanced by robust cash and net working capital forecasting. Without a regular 13-week (or longer) cash flow forecast and, crucially, variance analysis against prior forecasts, you’ll lack the proactive vision needed to make meaningful improvements. These forecasts provide a roadmap, highlighting potential cash crunches or opportunities to invest surplus funds. Variance analysis is equally important, as it allows you to identify forecast inaccuracies and refine models over time. By continually improving forecast confidence and accuracy, you can anticipate challenges, make data-driven decisions, and proactively manage net working capital for optimal performance.
Conclusion
Optimizing net working capital is not a one-time project—it’s an ongoing journey. It requires relentless focus on efficiency, accuracy, and collaboration across all departments. But the rewards are well worth the effort. A healthy net working capital cycle is the foundation of a successful business, providing the fuel for growth, innovation, and long-term sustainability.
About Full Scope Insights
FSI is a management consulting firm supporting forward-thinking organizations in building business resiliency through fit-for-purpose advisory and project execution. Through strategy consulting, M&A advisory, market research, finance and accounting services, sustainability advisory, human capital advisory, and sales & growth execution, we help clients navigate complex challenges and drive meaningful impact.
Let’s Connect to discuss your net working capital challenges and strategies for improvement.